Bank governor Mark Carney today revealed plans outlined in the Financial Stability Report for a new macroprudential tool giving the Financial Policy Committee the ability to “vary the affordability criteria that mortgage borrowers must meet”.
The tool will allow the FPC to impose stricter rules on the stress-testing element of affordability when lenders assess borrowers’ ability to pay if interest rates rise.
Carney said: “The FPC is acting today to create a new macroprudential tool…This will help ensure that underwriting standards don’t slip and that borrowers can afford to service their mortgages if conditions change more than they expect."
The current rules on affordability outlined in the Mortgage Market Review require firms to assess mortgage affordability if interest rates were to rise by a minimum of 3% in the next five years.
But the new tool will mean the FPC can force lenders to stress test borrowers’ affordability at a higher rate than this if they deem it necessary.
The report noted that some lenders are already using higher rates of interest to stress test borrowers’ ability to repay a mortgage but said it would be “prudent and proportionate” for the FPC to be allowed to offer guidance in this area.
Carney warned that despite an improvement in economic conditions and the housing market risks to financial stability remain including the high indebtedness of households.
He said these vulnerabilities had been kept in check by low interest rates and other policy interventions but a sharp rise in interest rates, especially if not associated with a strengthening in incomes, could test financial system resilience.
However the report offered lenders reassurance and said any future actions which affected underwriting standards would have to be “carefully considered” because of possible knee jerk reactions from lenders.
The FPC added that more intensive supervision of lenders could also come into force to maintain underwriting standards.
